Legislature(2021 - 2022)GRUENBERG 120
03/27/2021 01:00 PM STATE AFFAIRS
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HB 55-PEACE OFFICER/FIREFIGHTER RETIRE BENEFITS 2:13:45 PM CHAIR KREISS-TOMKINS announced that the final order of business would be HOUSE BILL NO. 55, "An Act relating to participation of certain peace officers and firefighters in the defined benefit and defined contribution plans of the Public Employees' Retirement System of Alaska; relating to eligibility of peace officers and firefighters for medical, disability, and death benefits; relating to liability of the Public Employees' Retirement System of Alaska; and providing for an effective date." 2:14:21 PM REPRESENTATIVE ANDY JOSEPHSON, Alaska State Legislature, prime sponsor, briefly reviewed HB 55 for the committee. He said the bill would restore a public safety PERS [Alaska Public Employee's Retirement System] defined benefit plan for the first time in 15 years to a segment of Alaska's workforce - a segment that, due to a lack of pension opportunities in this state, are leaving Alaska after "hundreds of thousands and millions of dollars" are spent by the state to train them effectively. He added that in the instances these workers stay in Alaska, they have inadequate funds to enjoy retirement in a reasonable way. He went on to discuss the main components of the bill, explaining that [public safety] workers would contribute a base of 8 percent as employee contribution to their own defined benefit, which could rise to 10 percent on command of the ARM [Alaska Retirement Management] Board. The total contribution would be 22 percent from the employer, which is identical to Tiers III and IV. He said the vesting would be five years; however, the provisions include a minimum retirement age of 55 with 20 years of service. Furthermore, to increase the plan's affordability, there is a "high five averaging to look back on their salary," as well as a post-retirement pension adjustment, which could be removed if the funding of the plan is less than 90 percent. He noted that currently, the overall system is not at 90 percent. He summarized the saving mechanisms, including the five-year averaging, the 10 percent base rate increase, and the absence of full medical coverage. For these reasons, he shared his belief that the bill is urgent. 2:18:00 PM CHAIR KREISS-TOMKINS opened invited testimony. 2:18:31 PM PAUL MIRANDA, President, Alaska Professional Fire Fighters Association (AKPFFA), introduced himself and informed the committee that he is currently an engineer at the Anchorage Fire Department. He introduced his associate, Tom Wescott. 2:19:00 PM TOM WESCOTT, Alaska Professional Fire Fighters Association, introduced himself as the former president of AKPFFA and said he is available to answer questions from the committee. 2:19:27 PM MR. MIRANDA introduced a PowerPoint presentation, titled "Costs of Maintaining the Status Quo." He said the purpose of today's presentation is to illustrate that Alaska is facing a public safety recruitment and retention crisis. He directed attention to slide 2, explaining that since Tier IV became effective in 2006, several unintended consequences became apparent for Alaska's public safety employees. He reported recruitment difficulties in Alaska's public safety agencies, such as Department of Public Safety (DPS), Department of Corrections (DOC), and municipal fire and police departments across the state. He said Alaska can no longer compete with the Lower 48 when attempting to recruit public safety employees. Police officers and paramedics are in high demand across the country and Alaska is at a clear disadvantage compared to other states with regard to retirement and benefits. He asserted that Tier IV is unlike any public safety retirement plan in the country, and it is part of the reason Alaskan communities struggle to fill public safety positions. He addressed impactful retention costs, which would be illustrated in later slides, adding that crucial dollars are being siphoned off while dealing with separations and a recruitment process that is made more difficult by the benefit package. He stated that once Alaska's agencies find an employee and invest time and money into him/her, there is a need to get a return on that investment. Additionally, he anticipated increased workers compensation costs as agencies become staffed with an older workforce that lacks the financial security to retire. 2:22:02 PM MR. MIRANDA turned to slides 3 and 4, which featured testimony from police and fire chiefs that highlighted the difficulties surrounding recruitment and retention. He added that the state's own actuary assumes increased retention with HB 55. He addressed workers compensation costs on slide 5, noting that individuals under the Tier IV plan have not yet retired after working a full 20/25-year career in public safety because the plan is only 15 years old. He recalled a slide from the bill sponsor's presentation on 3/13/21 that detailed three independent reviews of Tier IV, all indicating that most of Alaska's public safety employees would mot have enough money to retire, even after a 30-year career. Additionally, many public safety employees do not participate in Social Security. He reported that the average hiring age of a public safety worker is 31; therefore, as agencies become staffed with an older workforce that lacks the financial security to retire, workers compensation costs are likely to increase due to the physical nature of the job and the likelihood that older public safety employees get injured at much higher rates. According to a Rand Corporation study on California firefighters, older firefighters are particularly prone to musculoskeletal disorders (MSDs) with an MSD injury rate that is more than double that of their younger colleagues and ten times greater than that of private- sector workers of the same age. In addition to the physical demand, he pointed out that individuals who are no longer mentally prepared to do the job should have the ability to leave for their own sake and for the good of the community they serve. 2:27:58 PM MR. MIRANDA continued to slide 6 and outlined unforeseen costs, such as increased overtime due to inadequate staffing; increased training costs; loss of operational capabilities; loss of experience and future leadership; and rise in organizational stress levels. He moved to slide 7, which emphasized that recruitment and retention problems would likely increase. He reported that current recruitment and retention difficulties across Alaska are occurring with 40-50 percent of the workforce still in a defined benefit system; Tier IV currently makes up 50-60 percent of the public safety workforce and the problem would magnify as that population grows. He stated that a 100 percent portable public safety workforce is a frightening thought for chief officers around the state. MR. MIRANDA turned to slide 8 and reported that there are 3,400 public safety employees in Alaska that the bill would be applicable to. He approximated $120,000 as the average training cost, although some agencies, such as airport police and fire, report costs as high as $240,000. 2:30:53 PM CHAIR KREISS-TOMKINS inquired about the component costs of the $120,000 figure. MR. MIRANDA said it includes things like recruitment, testing/hiring processes, and training academy. CHAIR KREISS-TOMKINS noted his curiosity in a cost/component breakdown. Nonetheless, he acknowledged that retention is a problem. 2:32:45 PM MR. MIRANDA offered to follow up with that information. He resumed the presentation on slide 9, titled "what is the 'fiscal note' for maintaining the status quo?" He relayed that both DPS and DOC had testified to the legislature of non-retirement separations greater than 6 percent. He reminded the committee that this is occurring when Tier IV makes up less than 60 percent of the overall public safety workforce. He proceeded to examine the $120,000 average training cost - not increased for inflation - and the costs of losing one, two, and three percent of a Tier IV workforce each year on slides 10-12. The cost of losing one percent of the workforce, or 34 employees, would be $4,080,000 over a one-year period, $20,400,000 over a five-year period, and $81,600,000 over a 20-year period. The cost of losing two percent, or 68 employees, would be $8,160,000 over a one-year period, $40,800,000 over a five-year period, and $160,200,000 over a 20-year period. Lastly, the cost of losing three percent of the workforce, or 102 employees, would be $12,240,000 over a one-year period, $61,200,000 over a five-year period, and $244,800,000 over a 20-year period. 2:35:50 PM MR. MIRANDA turned to slide 13/14 and said these costs are not fully representative of the problems that would result from non- retirement separation of public safety employees. He emphasized that current costs far outweigh the cost of HB 55, adding that a one percent improvement in retention would more than cover the cost of the bill. He further noted that other jurisdictions across the country have restored defined benefit systems after facing similar experiences. He moved to slide 15 and concluded by reiterating that both labor and management are united in their support for this legislation. He pointed out that everyone has a shared interest in ensuring that Alaska has quality public safety employees. He said adopting an adequate retirement plan with reasonable costs, fair benefits, and shared risk would aid in this mission. 2:38:20 PM CHAIR KREISS-TOMKINS recalled that the bill had been painstakingly crafted to be cost-neutral. He asked for a refresher on the cost, if any, of this legislation. 2:39:06 PM ELISE SORUM-BIRK, Staff, Representative Andy Josephson, Alaska State Legislature, said the Division of Retirement and Benefits had an actuary report conducted on the previous version of the bill and estimated that the annual cost would be $3.5 million. She noted that the cost would be less money paid toward the unfunded liability. She expounded that under HB 55, a small amount more would be paid directly towards the employee's plan compared to the current plan; therefore, less would be paid to the unfunded liability. She added that the division would conduct a new actuarial analysis for the current version of the bill when it moves to the House Finance committee. CHAIR KREISS-TOMKINS, as a Tier IV employee, asked if any of his compensation went to the unfunded liability. He sought further clarification on how [the proposed plan] differentiates from the status quo. MS. SORUM-BIRK relayed that currently, employers pay the employee a certain percentage, which contributes to retirement. She cited an Alaskan law - SB 125; adopted in 2008 - which sets employer contribution rates for PERS and obligates the ARM Board to calculate total annual contributions required to maintain the plan's service liability each year. She said, for example, that the rate for PERS in Alaska this fiscal year was 30.85 percent and under current law, the employer contributes 22 percent with the state making up the difference if it's not a state employer. CHAIR KREISS-TOMKINS interjected to verify that Ms. Sorum-Birk was speaking in reference to Tier IV. MS. SORUM-BIRK answered yes. She continued to explain that a municipality pays 22 percent, which is divided between a portion that's paid to the employee and a portion that's paid into the retirement system going towards the unfunded liability - partially supplemented by the state. 2:42:25 PM CHAIR KREISS-TOMKINS offered his understanding that every Tier IV beneficiary has a "lock box retirement system" that both the public sector and the employee contribute to, which is completely removed from the defined benefit part of previous tiers. He said he is surprised to hear that part of people's benefits under Tier IV go towards paying the unfunded liability for people in Tiers I-III. MS. SORUM-BIRK noted that only what the employer pays goes towards the unfunded liability. CHAIR KREISS-TOMKINS asked if the contribution that goes towards the unfunded liability, represented by Tiers I-III, is the $300 million or so odd dollars that the state pays every year. MS. SORUM-BIRK answered, "in simple terms, yes." She added that sometimes the state chooses to supplement that. CHAIR KREISS-TOMKINS said he is still unclear on how the state is fulfilling the obligation of paying down unfunded liability changes with the introduction of "Tier V." MS. SORUM-BIRK replied the easiest way to think of it is that currently, a smaller percentage of the employer's 22 percent contribution is going towards the Tier IV employee than would go to the "Tier V" employee. She said employees under "Tier V" would receive 12 percent with 10 percent going toward the unfunded liability. 2:45:05 PM REPRESENTATIVE STORY directed the committee to the state actuary report narrative [included in the committee packet], which provided a fiscal note analysis for the previous version of the bill. She asked if the pie graph on page 2 accurately depicts the figures being discussed. MS. SORUM-BIRK answered yes. REPRESENTATIVE STORY asked for confirmation that MS. Sorum-Birk had stated that the proposed retirement plan is comparable to packages offered by other states. MS. SORUM-BIRK acknowledged that Washington is one of those states. She deferred to Mr. Wescott for further information. 2:46:55 PM MR. WESCOTT said compared to other states, the proposed plan is a greatly reduced benefit from what Alaska had in the past; additionally, it was modeled after the most well-functioning plans in the country that are fully funded, such as Washington and Wisconsin. He explained that aspects, such as the ability to raise employee rates and the ability to withhold inflation proofing, allow the plan to get back on track should it get behind and make the risk shared opposed to the state holding all the risk. REPRESENTATIVE JOSEPHSON shared his understanding that Washington's plan proved so solvent that the age of retirement was reduced from 55 to 53. He asked if that is correct. MR. WESTSCOTT confirmed [that the age of retirement was lowered in Washington]. 2:49:20 PM REPRESENTATIVE STORY questioned whether the size of the employee population in Washington impacted the ability to "drop" the payments. MR. WESCOTT said he is unsure whether the population size had any significance. He acknowledged that the pool of public safety employees in Washington's system is larger than Alaska's. He recalled that historically, Anchorage's police and fire plan was widely successful and ahead of its time with only 800 employees. He explained that good and bad plans are separated by those that makes consistent, steady contributions in the good times, as well as the bad. Ultimately, he opined that the size doesn't matter if sound practices are followed. 2:52:03 PM CHAIR KREISS-TOMKINS inquired about Alaska engaging in that in the past. MR. WESCOTT explained that when looking at past contribution rates into PERS, there was a time in the early 2000s when Alaska thought it was better funded than it was, so employer contributions fluctuated significantly lower than today's rates. He said regardless of being fully funded or not, the proposed plan would continue making minimum contributions of 8 percent for the employee and 12 percent for the employer. He added that those who implemented Tier IV in 2005 recognize its shortcomings, especially in regard to public safety careers, which are shorter and involve physical and mental stresses. 2:55:11 PM REPRESENTATIVE TARR recalled being a staff person during the transition to Tier IV, explaining that the legislature and leadership at that time implemented $250 million in budget cuts over five years, which resulted in short funding the retirement system. CHAIR KREISS-TOMKINS posited that in effect, there was an existing unfunded liability that needed to be paid down and the state elected not to. Nonetheless, he pointed out that the unfunded liability existed because Tiers I-III were not actuarial sound in the first place. REPRESENTATIVE TARR agreed that it was a combination of both conjoined with economic downtowns that exacerbated the problem, which explains why, under Governor Sean Parnell, there was a substantial deposit in an attempt to catch up. 2:56:57 PM REPRESENTATIVE JOSEPHSON said the actuarial negligence can't be understated or overstated. He reported that according to Legislative Finance Division, the settlement was $500 million on that item alone. He offered his belief that the proposed plan "[hits] the sweet spot." CHAIR KREISS-TOMKINS sought clarification on whether Representative Josephson had said the actuarial negligence of Tiers I-III can or cannot be overstated. REPRESENTATIVE JOSEPHSON clarified that [the actuarial negligence] was severe. He offered his understanding that there was a lack of vigilance and advice was taken by an actuary who failed [the state] as evidenced by the settlement. CHAIR KREISS-TOMKINS said he feels reassured by what seems to be extremely aggressive diligence. He stated that there was unbelievable intergenerational injustice between Tiers I-III, adding that the amount of money spent by his generation and those younger to subsidize the negligence of Tiers I-III each year could pay for pre-kindergarten and free college for every Alaskan. He emphasized the importance of ensuring that the proposed plan is fully actuarially sound for future generations and reiterated his increasing confidence that it is [actuarially sound]. 2:59:18 PM REPRESENTATIVE JOSEPHSON noted that the legislation mentioned by Representative Tarr has been "re-amortized," as it was $700 million per year and is currently $350 million per year. He reported that the unfunded liability decreased from $11 billion to approximately $6.5 billion. CHAIR KREISS-TOMKINS surmised that the actuarial negligence and incompetence was in addition to wishful political thinking, which hurt the state and future generations. 2:59:55 PM REPRESENTATIVE STORY related that teachers under the new tier are also lacking Social Security, which has similarly resulted in retention difficulties across the state. She questioned whether expanding the proposed plan to all public employees was considered. REPRESENTATIVE JOSEPHSON said he is aware and sympathetic to it, adding that a new report from two months ago indicated that it could be done with some degree of security. He pointed out that there are unique circumstances associated with the [public safety] cohort in addition to the huge training cost born by the state. He offered his belief that the [public safety] cohort would have more support and could lead the way, adding that if solvency is proven over a short number of years, an opportunity could present itself. 3:01:58 PM CHAIR KREISS-TOMKINS, regarding the "Tier V" plan's HRA [health reimbursement arrangement], asked for the analysis on how sustainable three percent set aside for health is - relative to projections for cost of health care, especially accounting for the rapidly escalating projections. REPRESENTATIVE JOSEPHSON said it is a major "give" from the stakeholders because they are aware of its cost and unpredictability. He deferred to Ms. Sorum-Birk for further explanation. MS. SORUM-BIRK relayed that the HRA would act as a stopgap, adding that the new tier would have the same HRA as Tier IV and could be used to pay for medical expenses or to pay premiums. She explained that it's based off a three percent average PERS salary, which is significantly lower than the average public safety PERS salary. 3:03:44 PM MR. MIRANDA confirmed the comments from Ms. Sorum-Birk and Representative Josephson. He pointed out that the explosion in health care costs was a contributing factor to the unfunded liability of the previous tiers. He calculated that based on the current cost of pre-Medicare coverage, the HRA would cover between 3-5 years of medical premiums. There would still be a gap for most individuals, but the bill recognizes the unwanted possibility of creating an unfunded liability, which is why it removes the pre-Medicare medical coverage that was in the previous defined benefit tiers. He added that employees can look for ways to bridge the gap between retirement age and eligibility age - the HRA would help with that, but it wouldn't be a total solution. 3:06:05 PM CHAIR KREISS-TOMKINS announced that HB 55 was held over.